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Kroger’s Margins Expected to Deteriorate Further in 3Q18

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Dec. 4 2020, Updated 10:53 a.m. ET

Kroger’s margins have deteriorated continuously over the last year

As mentioned previously, Kroger’s (KR) top line has grown over the last 15 quarters, despite rising competition and other headwinds. However, its profitability has taken a hit in the last year.

Kroger’s EPS (earnings per share) have fallen for the last four quarters. The company has sacrificed its gross margin in all of these quarters, indicating that it has been making price investments to stay competitive.

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Kroger’s gross margin narrowed 120 basis points from 22.9% in 1Q17 to 21.7% in 2Q18. It should be noted that Kroger’s margins are already weaker than other major retailers’. The company’s trailing-12-month gross margin of 22% is narrower than Walmart’s (WMT) 25.6%, Sprouts Farmers Market’s (SFM) 30%, and Dollar Tree’s (DLTR) 31.3%.

Looking into 3Q18

The third quarter of 2018 is expected to be another quarter of margin deterioration for Kroger. Its gross margin is projected to narrow 30 basis points to 20.9% from 3Q17, its operating margin is expected to contract 20 basis points to 2.5%, and its EPS are projected to fall 2.4% to $0.40.

While the company’s profitability has deteriorated over the last couple of years, it should be noted that Kroger has not missed earnings expectations in the last 15 quarters. Investors seeking exposure to Kroger could consider the First Trust Consumer Staples AlphaDEX ETF (FXG), which has a 5.3% exposure to Kroger.

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